What Matters Most When Investing

investment

It’s important to be reminded of what really matters most. While money is a primary concern for many, and it has a heightened importance for those who have lost their primary source of income, some things are even more important. Health. Family. Safety.

My interpretation of the finance and investing literature is that the best way to invest is to primarily use a low-cost, broadly diversified, fixed asset allocation of equity and fixed income index funds tilted to small and value factors.

With investing, it is far better to have a plan that you know you will have to change and tweak as the years go by than to not have a plan at all.

Setting Appropriate Financial Goals

Taking an Appropriate Amount of Risk

Many investors take too little risk, squirreling their money away solely in bank accounts, CDs, muni bonds, whole life insurance, gold, or burying it in the back yard. Their portfolio never grows enough to meet their goals.

An Adequate Savings Rate

There is data behind that recommendation, but depending on your goals and investment methods, you may need anywhere from 10-30%. However, 5% isn’t going to cut it. It doesn’t matter what your investment return is if you don’t have much money invested.

Starting Early

You’re not going to win a football game if your offense doesn’t arrive at the stadium before the 4th quarter. Likewise, it’s unlikely you’ll reach reasonable retirement goals if you leave all your retirement savings for your last decade.

Broad Diversification

Diversification protects you against what you don’t know and what you can’t know. The best way to “shorten your tails” (making the distribution of possible outcomes more narrow) is to invest in many different securities, asset classes, and factors.

Keep Your Costs Low

Every dollar you pay in commissions, loads, Expense ratios, bid-ask spreads, insurance costs, hedging costs, advisory fees, etc is a dollar out of your pocket. Small numbers add up to very large numbers over long periods of time.

Pay Attention to Taxes

One of the most significant expenses for investors is their associated tax bill. Become familiar with the tax benefits of tax-deferred accounts, Roth accounts, tax-loss harvesting, tax-gain harvesting, qualified dividends, long-term capital gains, the step-up in basis at death, life insurance, annuities, UGMA/UTMAs, 529s, ESAs, etc.

FOR MORE ABOUT THIS POST, VISIT PHYSICIAN ON FIRE